Farming partnership arrangements are usually more complicated than they might first appear. They often involve the ownership of valuable assets, and involve issues of land ownership, succession planning and tax mitigation.
Many farming partnerships are traditional partnerships governed by the Partnership Act 1890, although we are seeing more Limited Liability Partnerships. Difficulties in farming partnerships arise for a number of reasons, but more often than not due to the lack of properly prepared documentation (e.g. the partnership agreement or accounts). These issues have manifested themselves, over the years, in many disputes that have ended up in court, usually to the detriment of all concerned. A recent example was Ham v Ham and another . This case (between parents and their son) concerned the interpretation of a farm partnership agreement, in particular, the valuation provisions of the outgoing partner’s interest.
Obviously, having properly prepared documentation will help avoid a dispute. It should also assist in estate planning and tax mitigation. IHT Business Property Relief is available at the rate of 100% for the value of property consisting of a “business or an interest in a business”. Where the deceased was carrying on business in partnership, his share in the partnership will be an “interest in a business” attracting the 100% rate of relief. Where land or buildings, or plant and machinery, are owned privately by a partner but used in the partnership, IHT Business Property Relief may be available but only at the rate of 50%. Consequently, there is an IHT incentive to ensure that land, particularly by reason of its value and its tendency to increase in value, should be a partnership asset so that its value will attract Business Property Relief at the rate of 100% rather than 50%.
However, transferring such an asset into the partnership may have a significant effect upon the rights of the partner who has contributed the land to the partnership. He might find that his rights in relation to the land are very different to what he might have assumed them to be, for example, on a dissolution of the partnership. Lord Justice Briggs, in the Ham v Ham case, said that: “It is unhappily common for this type of issue not to be clearly dealt with in partnership agreements. It is an obvious problem in relation to farming partnerships, where the land forms an asset of the firm.”
Consideration and advice should also be taken as to the tax consequences of transferring any assets into the partnership. Without careful planning a farmer could easily be left with a hefty capital gains tax bill. It is vital therefore that partnership arrangements are reviewed and documented by an expert who understands farming partnerships and their relationship to effective estate planning and tax mitigation.
The content of this article is intended as general information only and does not constitute legal advice.